FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED OCTOBER 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number: 0-14922
ABC DISPENSING TECHNOLOGIES, INC.
(Name changed from American Business Computers Corporation)
(Exact name of registrant as specified in its charter)
Florida 59-2001203
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 Kennedy Road Akron, Ohio 44305
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 733-2841
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: [ X ] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date is:
Common Stock outstanding at November 21, 1997 was 17,320,347.
<PAGE>
Index
ABC Dispensing Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Part I Financial Information Page No.
_________________________________________________________________________________________________________________
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - October 25, 1997 and April 26, 1997 3
Consolidated statements of operations - Six months ended October 25, 1997 and
October 26, 1996 4
Consolidated statements of cash flows - Six months ended October 25, 1997 and October 26, 1996 5
Consolidated statement of stockholders' equity - Six months ended October 25, 1997 6
Notes to consolidated financial statements - October 25, 1997 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15
Part II Other Information
_________________________________________________________________________________________________________________
Item 1. (Not Applicable)
Item 2. (Not Applicable)
Item 3. (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. (Not Applicable)
Item 6. Exhibits and Reports 17
Signature 18
</TABLE>
2
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS October 25, 1997 April 26, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 288,000 $ 445,000
Trade receivables:
Accounts receivable, less allowance for doubtful accounts
of $75,000 as of October 25 and $191,000 as of April 26 747,000 327,000
Inventories (Note 4) 1,474,000 1,431,000
------------ ------------
Total current assets 2,509,000 2,203,000
Property, Plant, and Equipment 681,000 704,000
Other assets:
Intangible assets, less accumulated amortization of $592,000
as of October 25 and $552,000 as of April 26 64,000 102,000
Patents pending and deferred charges 164,000 341,000
------------ ------------
Total other assets 228,000 443,000
Total Assets $ 3,418,000 $ 3,350,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 864,000 $ 877,000
Line of credit 390,000 2,000
Current portion of long-term debt (Note 5) 34,000 36,000
Accrued liabilities 376,000 517,000
------------ ------------
Total current liabilities 1,664,000 1,432,000
Long-term debt (Note 5) 580,000 283,000
Stockholders' equity (Note 6):
Preferred Stock, 9% cumulative; authorized 320 shares
297 shares issued at October 25 (271 at April 26) 3,713,000 3,388,000
Common Stock, $.01 par value; authorized 50,000,000
shares; 17,320,347 shares issued at October 25
(17,114,279 at April 26) 174,000 171,000
Additional paid-in capital ($36,785 restricted for cost of
treasury shares held) 19,230,000 19,014,000
Retained earnings (deficiency) (21,858,000) (20,850,000)
------------ ------------
1,259,000 1,723,000
Less notes receivable - stockholders (48,000) (51,000)
Less cost of treasury stock, 35,000 shares (37,000) (37,000)
------------ ------------
Total Stockholders' Equity 1,174,000 1,635,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,418,000 $ 3,350,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Six months and three months ended October 25, 1997 and October 26, 1996
Unaudited
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
Oct. 25, 1997 Oct. 26, 1996 Oct. 25, 1997 Oct. 26, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Products and services $ 2,516,000 $ 2,138,000 $ 1,180,000 $ 960,000
Cost and expenses:
Products and services 1,760,000 1,763,000 834,000 727,000
General and administrative 733,000 1,013,000 334,000 459,000
Selling and marketing 222,000 305,000 109,000 149,000
Research and development 606,000 391,000 321,000 213,000
------------ ------------ ------------ ------------
Total cost and expenses 3,321,000 3,472,000 1,598,000 1,548,000
Loss from operations (805,000) (1,334,000) (418,000) (588,000)
Other income and expense:
Interest expense (48,000) (62,000) (30,000) (29,000)
Other income 64,000 12,000 4,000 2,000
------------ ------------ ------------ ------------
Total other income/(expense) 16,000 (50,000) (26,000) (27,000)
Net loss (Note 3) ($ 789,000) ($ 1,384,000) ($ 444,000) ($ 615,000)
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding 17,104,445 17,048,720 17,129,611 17,109,160
------------ ------------ ------------ ------------
Net loss per share ($ 0.05) ($ 0.08) ($ 0.03) ($ 0.04)
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
October 25, 1997 October 26, 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities (1,154,00) ( 614,000)
- -------------------------------------
Cash used in investing activities ( 14,00) ( 21,000)
- ---------------------------------------
Cash flows from financing activities:
Proceeds from private placements of Preferred Stock 325,00 1,293,000
Proceeds (advances) from line of credit - net 388,00 ( 67,000)
Repayment of notes payable and loan costs ( 25,00) ( 616,000)
Proceeds from issuance of notes payable 310,00 -
Other 13,00 9,000
--------- -----------
Net cash provided by financing activities 1,011,00 619,000
--------- -----------
Net decrease in cash and cash equivalents ( 157,00) ( 16,000)
Cash and cash equivalents at beginning of year 445,00 488,000
--------- -----------
Cash and cash equivalents at end of period $ 288,00 $ 472,000
========== ============
</TABLE>
See accompanying notes.
5
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended October 25, 1997
Unaudited
<TABLE>
<CAPTION>
Common
Number of Stock Additional Retained Notes
Shares of $.01 Par Preferred Paid-in Earnings Receivable Treasury
Common Stock Value Stock Capital (Deficiency) Stockholders Stock
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 26,1997 17,114,279 $171,000 $3,388,000 $19,014,000 $(20,850,000) $(51,000) $(37,000)
Preferred Stock private
placement (Note 8) $325,000
Preferred Stock Dividend 241,068 3,000 216,000 (219,000)
(Note 8)
Collection on notes receivable-
stockholders 3,000
Net loss (789,000)
Treasury Stock
---------------------------------------------------------------------------------------
Balance at October 25, 1997 17,355,347 $174,000 $3,713,000 $19,230,000 $(21,858,000) $(48,000) $(37,000)
===========================================================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
ABC Dispensing Technologies, Inc. (the "Company") designs proprietary dispensing
systems to dispense and blend liquids, powders and other ingredients to a
uniform and high degree of accuracy. The Company provides training, installation
and product service and also custom designs and manufactures its own proprietary
dispensing equipment to meet the needs of its customers which are located
primarily in the United States. To date, the Company has focused its development
and marketing efforts on the Beverage and Paint Industries.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended October 25, 1997 are
not necessarily indicative of the results that may be expected for the year
ended April 25, 1998. For further information, refer to the Form 10-K for the
year ended April 26, 1997.
YEAR END - The Company's fiscal year-end is the Saturday closest to April 30,
which results in a fifty-two or fifty-three week year. Both fiscal 1998 and
fiscal 1997 consist of fifty-two weeks ending on April 25, and April 26,
respectively. References to the years 1998 and 1997 refer to fiscal years ended
April 25, 1998, and April 26, 1997, respectively.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and its subsidiaries, ABC Dispensing Technologies, Inc. and ABC Tech
Corp. Significant intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
FINANCIAL INSTRUMENTS - The carrying value of the Company's cash, accounts
receivable, accounts payable and notes payable are a reasonable estimate of
their fair value due to the short-term nature of these instruments. The
Company's long-term debt has variable interest rates and carrying value
approximates fair market value at October 25, 1997.
CONCENTRATION OF CREDIT - In the normal course of business, the Company enters
into transactions to meet the financing needs of customers. The Company performs
ongoing credit evaluations of customers' financial condition and generally
requires collateral from customers who finance purchases beyond thirty days. The
Company's exposure to credit risk associated with nonperformance on these
transactions is limited to amounts reflected in the Company's consolidated
financial statements, less the value, if any, of the secured equipment.
INVENTORIES - Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation is provided primarily by use of the straight-line method over
the estimated useful lives of the assets, which are five years for machinery and
equipment and thirty years for buildings.
INTANGIBLE ASSETS - Intangible assets consist of patents and purchased selling
rights which are recorded at cost. Amortization is provided using the
straight-line method over a period of five years or less.
REVENUE RECOGNITION - Revenue on equipment sales and installation is recognized
when the product is shipped and title transfers. Revenue for development
services and for service and support is recognized when the service is performed
unless there is a service contract. Revenue from service contracts is recognized
ratably over the contract term, generally one year. Royalty income is recognized
in accordance with the terms of the royalty agreement, which generally provides
that royalties are based on units shipped.
7
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MAJOR CUSTOMERS - Revenues from The Home Depot, Inc. was 80 percent of total
revenues for the six months ended October 25, 1997. Revenues from The
Sherwin-Williams Company were 72 percent of the Company's total revenues for the
six months ended October 26, 1996. The Company currently has no orders from The
Sherwin-Williams Company, and in the future expects revenues from sales to The
Sherwin-Williams Company to decrease significantly.
PROVISION FOR WARRANTY CLAIMS - Estimated warranty costs are provided at the
time of sale of the warranted products.
STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number
of shares to employees generally with an exercise price equal to the fair value
of the shares at the date of grant. The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees, " and, accordingly, recognizes no
compensation expense for the stock option grants. Additional disclosures
relating to stock option activity which are required by Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock Based Compensation" are
included in note 7.
NET LOSS PER SHARE - Net loss per share is computed on the basis of weighted
average number of common stock shares outstanding for the period. Common stock
equivalents would be anti-dilutive, and therefore, are not included in the
computation of the net loss per share.
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. This statement
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international EPS standards. This statement is effective for
financial statements issued for periods ending after December 15, 1997. The
Company does not believe that the adoption of SFAS No. 128 will have a
significant impact on reported EPS.
LONG-LIVED ASSETS - In 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. The
adoption of SFAS No. 121 had no effect on the financial statements.
3. GOING CONCERN UNCERTAINTY
The Company has reported a net loss for each year of operation since its
inception except for 1989, and as of October 25, 1997, has an accumulated
retained earnings deficiency of $21,858,000. The Company's cash flow from
operating activities was a negative $1,158,000 for the six months ended October
25, 1997, and a negative $2,684,000 for the year ended April 26, 1997. Cash and
cash equivalents declined from $1,309,000 at the beginning of fiscal 1996 to
$288,000 at October 25, 1997. Management expects that the Company will continue
to incur losses and use cash in operations in the near future.
Management recognizes the Company must generate additional funds to assure
continuation of operations. The Company has been successful in raising capital
from private investors and raised $5,695,000 over the past three years through
private placements of both preferred and common stock. The Company is continuing
in it efforts to raise capital through private placements of 9% Convertible
Cumulative Preferred Stock. The Preferred Stock is convertible into common stock
at $1 per share. Proceeds from private placements will be used to reduce
accounts payable and provide additional working capital. No assurances can be
given that the Company will be successful in raising additional capital.
Further, there can be no assurance, assuming the Company successfully raises
additional funds, that the Company will achieve profitable operations or
positive cash flow. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. No adjustments to the amounts or
classification of assets and liabilities which could result from the outcome of
this uncertainty are reflected in the consolidated financial statements.
8
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
At October 25, 1997 and April 26, 1997, inventories consisted of the following:
October 25, April 26,
1997 1997
-------------- -------------
Raw Materials $ 1,015,000 $ 927,000
Work-in-process 101,000 118,000
Finished goods 358,000 386,000
-------------- -------------
$ 1,474,000 $1,431,000
============== =============
The above amounts are net of obsolescence reserves of $838,000 at October 25,
1997, and April 26, 1997, respectively.
5. FINANCING ARRANGEMENTS
NOTES PAYABLE
In June 1994, the Company purchased its headquarters facility in Akron, Ohio for
$490,000. A note payable was entered into during fiscal 1995 to partially
finance this purchase which was previously leased from the former chairman. The
note payable has an adjustable interest rate (9.03% at October 25, 1997, and
9.25% at April 26, 1997) which may not increase or decrease by more than 2% once
every three years. The maximum increase or decrease is 6% over the life of the
loan. Principal and interest payments of $3,026 are payable monthly with the
balance of $143,000 due October 1, 2005. The note payable is secured by the
headquarters facility. At October 25, 1997, the facility and improvements
thereto have a net book value of $541,000.
In August, 1997 the Company began issuing notes payable at a discount. The notes
are sold in multiples of $12,500, or fractions thereof, and pay interest at the
rate of 10%, with principal and interest paid at maturity. The initial maturity
date is June 30, 1998, however, the Company may, at its sole option, extend the
maturity date to December 31, 1998. Attached to notes are redeemable common
stock purchase warrants to purchase 5,000 shares of the Company's common stock
at a price of $1.25 per share. The warrants are exercisable for a period of five
years commencing on the date of issuance. The notes have not been discounted for
the warrants issued since the value of such warrants is not deemed to be
material. As of November 14, 1997, the Company has issued notes in the aggregate
of $310,000.
At October 25, 1997 and April 26, 1997, notes payable consisted of the
following:
October 25, April 26,
1997 1997
-------------- ------------
Note payable to bank $ 262,000 $268,000
Notes payable 310,000 -
Other 42,000 51,000
-------------- ------------
614,000 319,000
Less amounts due within one year (34,000) ( 36,000)
-------------- ------------
Total long-term debt $ 580,000 $283,000
============== ============
Maturities of notes payable for the five years subsequent to April 26, 1997, are
as follows: 1998--$36,000; 1999--$344,000 2000--$23,000; 2001--$19,000 and
2002--$18,000.
9
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMON STOCK
Stock Option Plans
- ------------------
The Company has non-qualified stock option plans under which directors, officers
and key employees may be granted incentive stock options for the purchase of the
Company's common stock An aggregate of 500,000 shares of the Company's common
stock were reserved for issuance under the Company's 1990 Stock Option Plan and
1,750,000 shares were reserved for issuance under the Company's 1995 Stock
Option Plan and amendments thereto. All granted options are exercisable after
six months from the grant date provided the employee has at least one year of
service. Grant options expire five years after grant date. The Company also may
grant incentive stock warrants to directors, officers and key employees. The
stock warrants can be redeemed to purchase the common stock of the Company.
A summary of the Company's stock option plans and employee stock warrants, and
related information for the six months ended October 25, 1997, and October 26,
1996, is as follows:
<TABLE>
<CAPTION>
October 25, 1997 October 26, 1996
----------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise price Shares Exercise Price
---------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,518,323 $ 1.68 510,966 $ 2.46
Granted 476,000 $ 1.07 488,109 $ 1.37
Cancelled (156,689) $ 1.81 - -
----------- --------
Outstanding at end of period 1,837,634 $ 1.51 999,075 $ 1.93
=========== ========
Exercisable at end of period 1,216,634 $ 1.53 810,966 $ 2.38
=========== ========
Available for grant 1,022,366 740,925
=========== ========
Weighted average fair value of options
granted during the period $ 1.07 $ 1.37
</TABLE>
The following table summarizes information about stock options and employee
stock warrants outstanding and exercisable by price range as of October 25,
1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of exercise prices Shares Life Exercise Price Shares Exercise Price
- ------------------------ -------- ----------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$0.84 - $1.25 1,215,732 4.93 $ 1.13 819,732 $ 1.14
$1.38 - $2.50 421,652 7.41 $ 1.44 196,652 $ 1.52
$2.88 - $3.50 200,250 3.17 $ 3.13 200,250 $ 3.13
---------- ----------
1,837,634 1,216,634
========== ==========
</TABLE>
10
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMON STOCK (CONTINUED)
Accounting for Stock Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock based compensation. The exercise price of each
stock option and employee stock warrant equals the market price of the Company's
stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plans.
During 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 defines a fair valued based method of accounting for an
employee stock option and similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, SFAS 123 allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed in APB 25.
Entities that elect to continue using APB 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting defined in SFAS 123 had been adopted.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during the six months ended October 25, 1997, and October 26,
1996, using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following weighted average assumptions:
Risk-free interest rate 6.54%
Dividend yield 0 %
Volatility 79%
Average life 5 years
Using the Black-Scholes methodology, the total value of options granted during
the six months ended October 25, 1997, and October 26, 1996, was $361,000 and
$251,000, respectively. If the Company had accounted for its stock-based
compensation plans in accordance with SFAS 123, the Company's net loss and net
loss per share would approximate the pro forma disclosures below:
October 25, 1997 October 26, 1996
---------------- ----------------
Net Loss As reported $ (789,000) $ (1,384,000)
Pro forma $ (1,100,000) $ (1,635,000)
Primary earnings per share As reported $ (0.05) $ (0.08)
Pro forma $ (0.06) $ (0.10)
Warrants
- --------
On May 15, 1997, the Company granted 365,000 warrants at $1.125 per share to 38
employees of the Company.
On October 10, 1997, the Company granted warrants to C. Rand Michaels, Director
(20,000), Herbert L. Luxenburg, Director (20,000), and Frank E. Vaughn, Director
(40,000) at $0.844 per share.
11
<PAGE>
ABC DISPENSING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREFERRED STOCK
From August 1, 1996, to October 30, 1996, the Company issued 132 shares of
Preferred Stock in exchange for the surrender of the Company's outstanding
$25,000, 9% Convertible Subordinated Redeemable Notes due August 1, 1999, in the
aggregate principal amount of $1,650,000.
As of October 25, 1997, through private placements, the Company issued 165
shares of Series A Preferred Stock in exchange for notes or $12,500 cash per
share, generating gross proceeds of $2,063,000 to the Company.
On October 7, 1997, the Company paid its February 1, and August 1, 1997,
Preferred Stock dividend requirements by issuing common stock. The total number
of common shares issued for the February 1, 1997 dividend was 61,240. The shares
were valued at $1.09359 per share. The total number of common shares issued for
the August 1, 1997 dividend was 179,828. The shares were valued at $0.84375 per
share.
8. OPERATING LEASES
For the six months ended October 25, 1997, and October 26, 1996, aggregate
rental expense was $21,000 and $18,000, respectively.
9. RETIREMENT BENEFITS
The Company sponsors a 401(k) plan which covers substantially all full-time
employees. Eligible employees may contribute up to 14% of their compensation to
this plan. The Company has agreed to match participants' contributions at the
rate of 25 cents on the dollar up to a maximum of 4% of the participants'
compensation. The cost of the Company's matching contribution for the six months
ended October 25, 1997, and October 25, 1996, was $7,000 and $8,000
respectively. The Company has the discretion to make a profit-sharing
contribution, but no such contribution has been made by the Company.
10. LITIGATION SETTLEMENT/CONTINGENCIES
The Company from time to time is subject to routine litigation incidental to its
business. The Company believes that any liability that may finally be determined
would not have a material adverse effect on its financial statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
For the first two quarters of fiscal 1998 the net loss was $789,000, a decrease
of $595,000, or 42.9%, from the $1,384,000 net loss for corresponding period of
the prior year. The net loss for the second quarter of fiscal 1998 was $444,000,
a decrease of $171,000, or 27.8%, from the $615,000 net loss for the second
quarter of the prior year.
REVENUES
Two Quarters Ended Second Quarter Ended
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
(in thousands)
Equipment sales $ 2,231 $ 1,812 $ 1,040 $ 812
Service revenues 285 326 140 148
------- ------- ------- ------
TOTAL $ 2,516 $ 2,138 $ 1,180 $ 960
======= ======= ====== ======
Equipment sales for the first two quarters of fiscal 1998 increased 23.1% over
the first two quarters of fiscal 1997. Equipment sales for the second quarter of
fiscal 1998 increased 28% over the second quarter of fiscal 1997. These
increases are due primarily to sales of the ROYAL MATCH (TM) paint colorant
dispensers to The Home Depot, Inc. Additionally, shipments to the
Sherwin-Williams Company ceased in the middle of the second quarter of the prior
year.
Service revenues for the first two quarters of fiscal 1998 were down 12.5% from
the first two quarters of fiscal 1997. The decrease was due to a $71,000
decrease in sales of replacement parts which was partially offset by a $30,000
increase in service labor revenues. Service revenues for the second quarter of
fiscal 1998 decreased 5.4% from the second quarter of fiscal 1997. The decrease
was due to a $40,000 decrease in sales of replacement parts which was partially
offset by a $32,000 increase in service labor revenues. Sales of replacement
parts are down due to discontinuation of the TINT-A-COLOR(TM) paint colorant
dispensers and the Omnitron(TM) soft drink dispensers. Service labor revenues
have increased due to installation charges on sales of ROYAL MATCH (TM) paint
colorant dispensers.
GROSS MARGINS
Two Quarters Ended Second Quarter Ended
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
Equipment 36.8 % 28.0 % 33.7 % 32.6 %
Service (12.7)% (17.9)% (6.8)% (21.7)%
------- ------- ------- -------
TOTAL 31.2 % 23.7 % 28.9 % 24.2 %
======= ======= ====== =======
For the first two quarters of fiscal 1998, gross margin as a percentage of sales
on equipment increased 8.8 points over the first two quarters of fiscal 1997.
For the second quarter of fiscal 1998, gross margin as a percentage of sales on
equipment increased 1.1 points over the second quarter of fiscal 1997. These
increases are due to changes in product mix.
For the first two quarters of fiscal 1998, gross margin as a percentage of
service revenues increased 5.2 points over the first two quarters of fiscal
1997. For the second quarter of fiscal 1998, gross margin as a percentage of
service revenues increased 14.9 points over the second quarter of fiscal 1997.
These increases are primarily due to equipment installation revenues being
recognized with no corresponding expense in the current period (see footnote 2
to the financial statements). Additionally, the decline in low (or negative)
margin service on soft drink equipment resulting from the discontinuation of the
Omnitron (TM) soft drink dispensers also contributed to the increase.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $280,000, or 27.7%, to $733,000 in
the first two quarters of fiscal 1998, down from $1,013,000 for the first two
quarters of fiscal 1997. Severance expense of $221,000 which was incurred in the
first two quarters of fiscal 1997 and a decreases in payroll expense and travel
expense of $206,000 and $330,000, respectively, during the first two quarters of
fiscal 1998 are primarily responsible for the decrease. These decreases were
partially offset by an increase in amortization of deferred charges of $160,000
and increased legal fees of $17,000 in the first two quarters of fiscal 1998.
For the second quarter of fiscal 1998, general and administrative expenses
decreased $125,000, or 27.2%, to $334,000, down from $459,000 for the second
quarter of fiscal 1997. Severance expense of $77,000 which was incurred in the
second quarter of fiscal 1997 and a decrease in payroll expense of $134,000 in
the second quarter of fiscal 1998 are primarily responsible for the decrease.
These decreases were partially offset by an increase in amortization of deferred
charges of $75,000 and increased legal fees of $40,000 in the second quarter of
fiscal 1998.
SELLING AND MARKETING EXPENSES
For the first two quarters of fiscal 1998, selling and marketing expenses
decreased $83,000, or 27.2%, to $222,000, down from $305,000 for the first two
quarters of fiscal 1997. The decrease was due to decreased payroll expense of
$83,000 and decreases expenses for fees, subscriptions, promotions and
literature aggregating $30,000. These decreases were partially offset by
increases in travel expenses of $20,000 and increased subcontractor fees of
$10,000.
Selling and marketing expense decreased $40,000, or 26.8%, to $109,000 in the
second quarter of fiscal 1998 due to decreased payroll expense. Selling and
marketing expenses for the second quarter of fiscal 1997 were $149,000.
RESEARCH AND DEVELOPMENT EXPENSES
For the first two quarters of fiscal 1998 research and development expenses
increased $215,000, or 55%, to $606,000, up from $391,000 for the first two
quarters of fiscal 1997. The increase is primarily due to increased payroll
expense of $207,000.
Research and development expenses increased $108,000, or $50.7%, to $321,000, up
from $213,000 in the second quarter of fiscal 1997. The increase is due to
increased payroll expense of $121,000 which was partially offset by a decrease
in parts and supplies expense of $13,000. These expenses are a result of
continued development of, and enhancements to, the ROYAL MATCH (TM) paint
colorant dispenser, the CHECK MATE (TM) software which controls the ROYAL MATCH
(TM), and the VIRTUAL SQUEEZE (TM) juice dispenser.
OTHER INCOME AND EXPENSE
For the first two quarters of fiscal 1998, interest expense decreased $14,000,
or 22.6%, to $48,000 from $62,000 for the first two quarters of fiscal 1997. The
decrease is due to lower debt balances in the first two quarters of fiscal 1998.
Other income increased $52,000, or 433%, in the first two quarters of fiscal
1998, up from $12,000 for the first two quarters of fiscal 1997. The increase is
attributable to the reversal of a liability and related expense that were
recorded but never incurred in the prior year.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $288,000 as of October 25, 1997 from
$445,000 as of April 26, 1997.
Operations during the first two quarters ended October 25, 1997 required cash of
$1,154,000 which resulted from a net loss of $789,000, an increase in net
operating assets of $458,000, a decrease in net operating liabilities of
$154,000, offset by depreciation and amortization of $247,000.
Consistent with prior years, the Company's primary source of liquidity has been
private placements of equity and equity derivative instruments. From August 1,
1996, to October 30, 1996, the Company issued 132 shares of Series A Preferred
Stock in exchange for the surrender of the Company's outstanding $25,000, 9%
Convertible Subordinated Redeemable Notes Payable in the aggregate principal
amount of $1,650,000. From August 1, 1996, through October 25, 1997, the Company
issued 165 shares of Series A Preferred Stock in exchange for $12,500 cash per
share, generating $2,063,000 cash (see footnote 8). Near term cash requirements
will be obtained using this same Preferred Stock vehicle.
In August, 1997, to raise additional working capital, the Company began issuing
short term promissory notes. The notes are sold in multiples of $12,500 and pay
interest at the rate of 10%, with principal and interest paid at maturity. The
initial maturity date is June 30, 1998, however, the Company may, at its sole
option, extend the maturity date to December 31, 1998. As November 14, 1997, the
Company has generated $310,000 in cash by issuing the notes.
In addition to private placements of equity and notes receivable, management
uses an accounts receivable-based credit line to meet short-term cash
requirements (see note 5 to the financial statements). The credit line bears an
interest rate of prime plus four points. As of October 25, 1997, the credit
limit was set at $450,000 with an outstanding balance of $390,000.
If the above sources of cash do not become available or are not sufficient, the
Company may be forced to curtail marketing and research & development activities
which would adversely affect future operating results. Additionally, if
management is successful in raising additional funds, there is no guarantee that
the Company will achieve profitable operations, or positive cash flow.
The current liquidity position of the Company and the inability of operations to
generate positive cash flow raises doubt about the Company's ability to continue
as a going concern (see note 3 to the financial statements). Management
recognizes these weaknesses and is taking aggressive steps to increase revenues
through increased sales and marketing efforts.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The 1997 Annual Meeting of Shareholders of the Company was held on October
13, 1997.
The Director nominees, Charles M. Stimac, Jr., Herbert L. Luxenburg, and
C. Rand Michaels were elected with 13,185,435 shares of common stock voting in
favor of their election and 77,513 shares voting against.
A proposed amendment to the Company's 1995 Stock Option Plan authorizing
an additional 1,000,000 shares of common stock for issuance upon the exercise of
options granted under the plan passed with 4,608,993 shares of common stock
voting in favor of the amendment, 717,632 shares voting against, and 7,936,323
shares abstaining.
The appointment of GRANT THORNTON LLP as the Company's independent
auditors for the Company's fiscal year ended April 25, 1998 was ratified with
13,066,919 shares of common stock voting in favor of the appointment, 19,690
shares voting against, and 86,939 shares abstaining.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
11. Statement regarding computation of per share earnings (see Financial
Statements at Item 1 of this Quarterly Report on Form 10-Q).
27. Financial Data Schedule.
(b) Current reports on Form 8-K during the quarter ended October 25, 1997.
During the second quarter of fiscal 1998, the Company filed no reports on
Form 8-K.
17
<PAGE>
SIGNATURE
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ABC Dispensing Technologies, Inc.
--------------------------------------------
(Registrant)
Date: December 5, 1997 /s/ Charles M. Stimac, Jr.
------------------------- --------------------------------------------
Charles M. Stimac, Jr.
President/CEO
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000748103
<NAME> ABC DISPENSING TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> OCT-25-1997
<CASH> 288,000
<SECURITIES> 0
<RECEIVABLES> 822,000
<ALLOWANCES> 75,000
<INVENTORY> 1,474,000
<CURRENT-ASSETS> 2,509,000
<PP&E> 1,575,000
<DEPRECIATION> 894,000
<TOTAL-ASSETS> 3,418,000
<CURRENT-LIABILITIES> 1,664,000
<BONDS> 0
0
3,713,000
<COMMON> 174,000
<OTHER-SE> 2,133,000
<TOTAL-LIABILITY-AND-EQUITY> 3,418,000
<SALES> 2,516,000
<TOTAL-REVENUES> 2,516,000
<CGS> 1,628,000
<TOTAL-COSTS> 1,760,000
<OTHER-EXPENSES> 1,497,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,000
<INCOME-PRETAX> (789,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (789,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (789,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
